CEO and Executives Compensation Caps

Proposal: Capping Executive Compensation in the United States

Objective:
To implement a policy that curtails the excessively high pay of CEOs and other top executives in the United States, aligning executive compensation with the broader interests of the workforce and the overall economy. This policy aims to reduce economic inequality, improve worker morale, and address the unacceptable reality that many full-time American workers rely on government assistance due to insufficient wages.

Overview:
In the U.S., CEO compensation has skyrocketed over the past several decades, far outpacing the growth in wages for average workers. Between 1978 and 2021, CEO pay has increased by 1,460%, compared to an 18% increase for the typical worker during the same period. In 2022, the average CEO-to-worker pay ratio was 399-to-1 in the United States. This stands in stark contrast to countries like Japan, where CEO pay is significantly more restrained, with an average pay ratio of 67-to-1.

The widening gap between CEO and worker pay has serious consequences. Today, millions of full-time workers in the U.S. rely on government assistance programs like food stamps (SNAP) and Medicaid to meet their basic needs. According to a 2020 report by the Government Accountability Office (GAO), an estimated 12 million American workers rely on Medicaid, and about 7 million workers, including full-time employees, depend on SNAP. Shockingly, these figures include employees from some of the largest and most profitable corporations in the U.S. such as Walmart and Amazon.

This effectively means that taxpayers are subsidizing low-wage employers, while executives in the same companies are taking home exorbitant pay packages. It is unacceptable that full-time work is no longer enough to cover basic living expenses for many Americans, and yet top executives continue to earn astronomical sums. The proposed policy would establish limits on executive compensation, tying it more directly to the performance and welfare of the broader workforce.

Proposal Details:

  1. CEO Pay Cap Relative to Worker Pay:
    A cap would be set to limit executive compensation relative to the average or median salary of the company’s workforce. For instance, CEO pay could be capped at 100 times the median worker salary. If a company’s median salary is $50,000, the CEO could not earn more than $5 million in total annual compensation.

    • Rationale: This approach ensures that when workers’ pay rises, CEOs can also see their compensation increase, thereby aligning executive incentives with the well-being of the workforce. Additionally, it discourages practices where low wages are supplemented by public assistance programs funded by taxpayers.
  2. Incentivizing Companies to Increase Worker Pay:
    Companies that keep the pay disparity low (e.g., a ratio under 100-to-1) would be rewarded with tax incentives, such as lower corporate tax rates or specific deductions related to employee benefits.

    • Rationale: By linking tax benefits to fair compensation practices, this approach encourages companies to invest in their workforce and reduces the reliance on excessive executive bonuses. It also helps reduce the burden on public welfare systems, as workers would be less likely to require government assistance.
  3. Reduction of Stock-Based Compensation:
    Stock options and performance-based pay often make up the largest portion of a CEO’s compensation, incentivizing short-term gains over long-term stability. A limit could be placed on the percentage of CEO compensation that comes from stock-based rewards, particularly to discourage short-termism.

    • Rationale: This would encourage more long-term strategic thinking, reducing the temptation for CEOs to engage in stock buybacks and other measures that artificially inflate stock prices without genuine company growth.
  4. Mandatory Transparency and Reporting:
    All companies with revenues over a certain threshold (e.g., $100 million annually) would be required to disclose the full compensation package of their top executives, along with detailed reports on the compensation ratio between the highest-paid executive and the median worker.

    • Rationale: Increased transparency ensures public accountability and provides investors, employees, and the public with better insight into corporate practices.

Supporting Evidence:

  1. Economic Inequality: Excessive CEO compensation contributes to income inequality. The top 1% in the U.S. owns 38.6% of the nation’s wealth. This growing inequality undermines economic stability and social cohesion, leading to political polarization and reduced economic mobility.

  2. Workers on Government Assistance: According to a 2020 study by the GAO, major U.S. employers like Walmart and Amazon have a significant number of employees who rely on Medicaid and SNAP. In some states, Walmart employees represent the largest group of Medicaid and food stamp recipients. The government essentially subsidizes the wages of workers at these companies through welfare programs while the CEOs of these corporations earn tens of millions annually. This dependence on public programs by full-time workers is a symptom of an economy that overcompensates executives while underpaying the workers who keep these businesses running.

  3. Worker Productivity and Morale: Studies have shown that significant pay gaps within companies can reduce employee morale and productivity. When workers feel they are not sharing in the company’s success, engagement drops, negatively impacting overall business performance. Fairer pay structures can boost morale and lead to better company outcomes.

  4. International Comparisons: Countries like Japan have managed to maintain globally competitive industries while keeping CEO pay much lower than in the U.S. Despite this, Japanese CEOs have successfully led major corporations in automotive, electronics, and manufacturing sectors, demonstrating that companies do not need exorbitant executive salaries to compete globally.

  5. Shareholder Returns: Research indicates that excessive executive compensation does not necessarily lead to better company performance. A 2016 study found that firms with more equitable pay structures between CEOs and workers actually performed better in the long run than those with higher CEO-to-worker pay ratios.

Conclusion:
Implementing a policy to cap executive compensation would promote fairness, reduce economic inequality, and realign executive interests with the long-term health of companies and their employees. Moreover, it would help ensure that taxpayers are not footing the bill for corporations that pay their workers too little to live on. A CEO pay cap would foster a more inclusive economy, reduce the growing gap between executives and workers, and ultimately benefit both businesses and society. This policy would also position the U.S. as a global leader in corporate responsibility and economic justice.

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